Hotline Support

The “Zoom” Boom: FINRA Maintains Its Authority to Compel Virtual Hearings Over Member Objections

wssllp - FINRA Amends Its Suitability
FINRA Amends Its Suitability, Capital Acquisition Broker Suitability and Non-Cash Compensation Rules to Comply with Sec’s Regulation Best Interest
September 1, 2020
SEC and FINRA Offer Observations to Improve Compliance with Reg BI and Form CRS
November 13, 2020

If we have learned anything in 2020, it is that the only thing constant in life is change.  The world has changed in just about every way and day-to-day life continues to evolve in light of those changes.  One major development is the increased use – or perhaps reliance – on remote communication.  Zoom, now a household term, has become a popular way for friends, family and colleagues to interact. However, as we increase the use of virtual meetings, we also lose many of the benefits of in-person interactions.

FINRA arbitrations are not immune to these changes.  In response to Covid-19, FINRA has administratively been postponing on a rolling basis all in-person hearings (currently scheduled through October 2, 2020) – “unless the parties stipulate to proceed telephonically or by Zoom or the panel orders that the hearings will take place telephonically or by Zoom.”  This proclamation by FINRA has been quite controversial among both FINRA member firms and their associated parties, and the customers who sue them.

Generally speaking, firms and their registered representatives have advocated for in-person arbitration hearings, while customers have been more willing to participate in hearings by Zoom.  Panels have issued orders requiring parties to proceed remotely, even when both parties have objected to the virtual hearing.  The Panel’s authority to issue such orders has been highly contested for the past several months.

Just last week, a registered representative, Carlos Legaspy (“Legaspy”), sued FINRA in the U.S. District Court for the Northern District of Illinois, claiming that a FINRA panel’s decision to compel a final arbitration hearing by Zoom was a breach of contract and a violation of his due process rights. (Legaspy v. FINRA, Case Number 1:20-cv-04700). In that regard, Legaspy sought a TRO and preliminary injunction prohibiting the hearing from proceeding via Zoom.  Legaspy cited to FINRA’s Code of Arbitration, arguing that the Rules were clear that the final evidentiary hearing will be held at a physical location defined in relation to the arbitration customer’s residence.  He also cited to the Uniform Submission Agreement FINRA registrants must sign in connection with arbitrations arguing that the language therein demonstrates the parties’ agreement that a final hearing will be held at a physical location.  Legaspy reasoned that, if FINRA intended to conduct virtual hearings, the Submission Agreement would have clearly stated that intention.  He further argued that FINRA’s Arbitration Code is entirely absent of any provision authorizing arbitrators to order a virtual hearing over the objection of a party.

In addition to the foregoing, Legaspy also alleged that his due process rights would be violated if forced to participate in a virtual final hearing.  He argued that his arbitration is going to be complicated in that it will require over two dozen witnesses, including about a dozen experts as well as hundreds of exhibits.  Further complicating his particular hearing is the fact that the customers require an interpreter as they do not speak English.  Legaspy contended that proceeding by Zoom would deprive him of his constitutional right to due process guaranteed by the Fifth Amendment because he would not be able to present an effective defense.

On August 13, 2020, the Northern District of Illinois rejected Legaspy’s arguments and held that he was not entitled to injunctive relief.  In regard to his breach of contract claim, the court held that FINRA was not a party to the Submission Agreement, so the language therein had no bearing on Legaspy’s claims.  The court further held that, even if FINRA were a party to the agreement, Legaspy would not likely succeed on his claim because under the Federal Arbitration Act the court does not oversee FINRA Rules.  Citing to FINRA Rule 12409, the court noted that the authority to interpret and apply FINRA Rules lies with the arbitrators and “[s]uch interpretations are final and binding upon the parties.”  The Court also disagreed with Legaspy’s due process argument.  It held that FINRA, as a private corporation, is not a state actor, and therefore, cannot be sued for violating the Fifth Amendment.

Most notably, perhaps, the Court further rejected Legaspy’s claim that he will be unable to present an effective defense.  Relying on its own experience with virtual evidentiary hearings (once with an interpreter), the court concluded that remote hearings do not prejudice the parties.  Although it acknowledged that remote hearings are “clunkier than in-person hearings,” the court proclaimed that they “in no way prevent parties from presenting claims or defenses.”  Finally, it concluded that the balance of equities was not in Legaspy’s favor because, among other reasons, issuance of a TRO “would force [FINRA] to choose between either holding in-person hearings that expose the arbitrators, [the parties and witnesses] to COVID-19, or indefinitely delaying its hearings.” Noting the uncertainty around the pandemic, the court stated that the delay would effectively be indefinite because it is unclear when in-person hearings will be held again.  Legaspy has appealed the District Court’s decision to the Seventh Circuit Court of Appeals which is currently pending.[1]

The Legaspy decision is a first of its kind and an unfortunate result for FINRA member firms and their registered representatives.  Being compelled to arbitrate remotely will undoubtedly cause already complicated and high-stress FINRA arbitrations to be even more challenging.  In-person witness testimony and the ability to easily navigate documentary evidence is lost in the remote setting.  Arbitration is entered into by agreement.  The fact that a panel can compel a virtual arbitration against the objections of all parties seems inconsistent with the core purpose of this forum.

As the issues surrounding virtual hearings continue to develop, one thing is certain – technology is crucial in today’s society.  Knowing how to use technology and having a level of comfort with it will only help parties and their counsel combat at least some of the challenges they are sure to face during virtual arbitrations.  Having a technological edge on one’s opponent is something to consider as we work to succeed despite the challenges we all face in our COVID-19 reality.

[1] As of the time of publication of this alert, the Court of Appeals issued an Order denying interim injunctive relief pending appeal and denying Legaspy’s request for expedited briefing on appeal.


WSSLLP is actively monitoring developments in the securities industry as a result of the impact of the Coronavirus.  If you have any questions or concerns on how it may impact you, please contact Michael Schwartzberg at Schwartzberg.m@wssllp.com or Allison Beatty at beatty.a@wssllp.com.